Modi's Demonetization May Jeopardize Bonhomie With Nepal

India’s lack of clarity and delay in exchanging banned demonetized currency bills held by the Nepalese is striking a sour note and could affect bilateral trade and tourism.

New Delhi (Sputnik) — The Narendra Modi government’s decision to demonetize its high-value currency in old INR 500 (US$ 7.33) and 1,000 (US$14.67) notes has had collateral damage on the neighboring Nepal.

Almost two months after Modi announced demonetization, Nepal’s ambassador in India seems to be losing patience. In an interview, he warned that any more delay on New Delhi’s part to convert scrapped Indian currency held by his citizens will erode bonhomie between the two countries. Indian currency is accepted as a legally valid tender in both Nepal and Bhutan due to close economic interdependencies.

In an interview to an Indian daily, Nepal’s ambassador Deep Kumar Upadhyay urged India to exchange the banned currency for new currency bills at the earliest.

“A decision should be taken urgently by India because people are losing confidence. The policy decision should have been discussed with us in advance, but even now, a timely, decisive intervention can improve the situation. People should not in any way be inconvenienced,” Upadhyay said in an interview to The Telegraph.

The delay in exchanging scrapped Indian notes could push the Nepalese citizens to use illegal channels for laundering. The higher cost of illegally laundering the notes could risk goodwill for New Delhi.

Different estimates suggest that Nepalese citizens could be holding around INR 35 billion ($ 513.4 million) in old INR 500 and INR 1,000 notes. So far, Nepal’s Central Bank has not asked its citizens to deposit the scrapped Indian currency notes. This could have otherwise created another way to launder unaccounted wealth back into the Indian financial system.

“We did not go that way because we support India, and because we recognise the open borders we have,” Upadhyay added. “That is why I am still hopeful and confident that India will respond to our need. But it needs to be done soon.”

New Delhi did not allow the simultaneous return of notes in India and Nepal. It could have triggered smuggling of notes by Indians across the open border into Nepalese accounts over which Indian tax authorities have no control.

Nepal’s trade and commerce is hit due to invalidity of old Indian currency, widely used in its tourism sector, especially at the lower-end. Also, the Reserve Bank of India, under an agreement sends INR 6 billion to the Nepal in exchange for an equivalent value in US dollars. But no supply has come from the RBI since demonetization was announced on November 8.

Nepal’s Central Bank is in an embarrassing situation. Despite professed close ties, the Indian Central Bank has not responded to the predicament of Nepalese citizens who have been left holding worthless Indian currency. India has set up a committee to look into the problems being faced by the people of Nepal and Bhutan where Indian currency is freely accepted.

In recent years, India-Nepal relations have wavered between extreme bouts of bonhomie and tensions. India has supplied an extra 400-megawatt of electricity in December to Nepal during the extreme winter season. But, differing perceptions between the two countries over the rights of Madhesi community in Nepal have impacted ties as well.